Pressing the pause button on life is one of the greatest advantage of travel. It is no accident that one such a pause provided me insights to write this post. The catalyst came in the form of a book I picked last fortnight from Dubai airport en route to Peru. Browsing through the titles in Business and Economics‘ section, my eyes suddenly got fixated on a book titled ‘Narconomics’ with a strange subtitle “How to run a drug cartel’’. The book was written by Tom Wainwright, Britain Editor of the ‘Economist’.

Thanks to Netflix, I had enough exposure lately on Pablo Escobar, El Chapo, their drug cartels and daring exploits of Narcos in many South American countries. A chance to go through economic analysis of Narcos was kind of god send. My own impending landing in Peru, the land of coca leaves, was an icing on the cake. Finally, the blurb by ‘The Times’ announcing Narconomics ‘an economics book for the ‘Breaking Bad generation’, quickly sealed my decision to purchase this book.

I’ve always been fascinated by economics, particularly of everyday kind. Its study provides a window on human nature in relation to men, machines and materials. True, economists (technologists also) have not been able to solve inequality, climate change and terrorism, three biggest issues grappling the World today, but economics and its study touches every aspect of human life. Be it within families, markets, work organizations, society or nations.

By the time I finished ‘Narconomics’ I was quite convinced on three counts.

1. Building and running drug cartels are exactly same as managing establishing businesses.

2. Economist, not police officers, would be more successful in winning the war on drug trafficking and abuse. One can include human trafficking, prohibition, prostitution etc. also in this list.

3. Wingify, our own company, or companies like Wingify also need to hire an economist – hence the title of this post.

I’ll talk about the first two bullets some other time, in some other context but let me dwell on point 3 for the moment. There is a caveat though. The scenarios depicted in subsequent paragraphs are imaginary and illustrative and in now reflect the reality at Wingify.

Wingify, like any other business on this planet, is an organized effort of individuals to produce and sell, for a profit, the products and services that satisfy its customers’ needs. It runs through the same business grind as any manufacturing company – Production – Distribution and Logistics – Marketing – Sales – Support. Though being a new age SaaS company, nomenclature of these function differs. But as any business with profit motive, it has to be on top of stuff like production cost, market share, comparative advantage, selling prices and hundreds of similar metrics that impacts its survival, growth and profitability.

What follows is the realization as to how an economist can add value to better understand various issues that currently touches Wingify in one way or another. There could be many impact points but lets focus on following select few right now.

Market size

Understanding market size is essential for a range of different strategic decisions, in areas such as: product and feature development, strategic alliances and distribution, organizational design and employee skillset. Huge variations in measurement of market could result in serious issues that adversely impact businesses.

For example – with a single tweak in spreadsheet, market size of apples trade (apple being a favorite pick of economists) could increase by 40% if the total traded quantity is multiplied by retail price instead of wholesale prices. What about the prices if the spread between minimum and the maximum price is very large? Which figure you’ll will consider and why? Also, what about the potential buyers who want apples but for one reason or another they don’t have access to product right now. Factoring all these and many other variables would change the assumptions that impact market size, market locations and target segments – and thereby change your decisions also – for good or bad. So getting the right estimates is to be any company’s priority no 1.

Same estimation problem prevails in SaaS industry. In such a scenario who would be best qualified if not an economist to understand fundamentals of a market.

Demand elasticity

When the price of a product goes up, the demand generally falls. But the size of fall varies drastically. Demand of some products is ‘elastic’ meaning that it drops significantly even with a small increase in price. However, demand of other products is ‘inelastic’, meaning that consumers will keep on buying more or less same amount as before, even in the face of big price rises. Measuring elasticity in SaaS industry is trickier for traditional marketers because data on both prices and demand is so hard to verify. Competing products have a wide variation in prices. Foe the sake of argument a company with same product feature sets could be loosing money just because it’s relentless focus is on pricing its products very low assuming (wrongly if the demand is inelastic) that it has customers because of low prices.

With the right tools in hand an economist would be in a better position to analyze the demand elasticity of Wingify’s various products.

Global regulations, Geopolitics and its impact.

Even if headquartered in one country, many companies, including Wingify, SaaS operations are a borderless business. So business of such SaaS companies get impacted by regulations, tax laws, public policy, intellectual property policies, visa regimes, data security / privacy laws or currency markets both in production as well as consumption countries. All these require a good economic analysis and an understanding of costs and benefits.

It would be surprising if companies like Wingify don’t think of macroeconomic environment that exist beyond India.

Though businesses have access to experts and subject matter specialists to advice on respective issue but it is only an economist who can synthesize a holistic view quite often needed to take a go, no go decisions.

Partnership and alliances

In Tech companies acquisition / merger decisions are often taken by engineers whose focus is primarily on the interoperability and integration of features. Such mergers quite often turn out to be unsustainable or plainly backfire because incentives of various stakeholders are not aligned.

Economists, on the other hand are experts at understanding the rewards and incentive structure for each stakeholders and are better equipped to design a right framework for correct equilibrium.

What is true for acquisitions and mergers is also true for building partnerships, alliances and franchises.

Diversifications

Businesses usually diversify when they generate surplus. Diversification is often into either product lines similar to the existing ones or altogether different line where a company have no prior experience but perceives a big market potential and / or demand gap.

Diversification is a challenging decision. There are huge risks and rewards. So prudence ask for a cautious and informed decision.

Lets see how an economist will take a diversification decision, specially in the scenario where a company has no prior experience – S/he will not start with market potential but with the capabilities and strengths the company have acquired over the years. For example, if Coke has a solid branding and has built a dream logistics and distribution network, they will advice coke to diversify into Coca Cola branded wines not venture into SaaS business. Likewise, economists may be tempted to advise coke to not diversify into a low calorie Coke variant as it will have a channel conflict with Coke’s flagship sugared product.

Moral of the story is – understanding of a market is desirable but a deep look at your strengths is absolutely essential. A good economist shall always build on those strengths. Economists knows that desirable strengths can be acquired either by building business alliances or through market research but inherent skills are earned over a period only through hard and smart work by various stakeholders within a company.

Coming back to SaaS context – to a software company that have reliable and demonstrated strengths and having earned a reputation in using customer insight to program, design, market, sell and support SaaS products, our economist friend will not shy away in recommending a diversification plan into areas like building an online trading platform for a category as different as fresh produce.

Finally, there are hundreds of micro chips like following which a company has to fry every passing day.

Do we let employee choose airlines while on business travel?

Do we incentivize sale of upgrade packages against new packages?

Does a good PR give better ROI than huge spend on marketing?

Try to hazard a guess – who will be in a better position to provide answered to questions like these. A tech manager, a bean counter, a business consultant or our good friend, an economist. You guessed it right. The answer is – Economist. Reason is simple. On the face of it, all excepts an economist, will have answers which even though look well meaning but doesn’t align well with the near and long term interests of company.

In nutshell – Economics and economists provides a more comprehensive view of business. They provide a more holistic view of the inter-relationships between individuals, markets and the larger economy, which help managers to make more informed decisions and guide their organizations to higher growth and profits.

I sometime wonder why World’s best business weekly “The Economist’ and India’s best business daily “The Economic Times” derive their name from Economics but businesses themselves shy away from hiring Economists.